Pace of Rate Hikes and Annuities

The Federal Reserve announced it’s raising interest rates by 0.75 percentage point, following its September 20-21 meeting, bumping the federal funds rate to a target range of 3.0 to 3.25 percent. With the Federal Reserve applying this type of aggressive approach when it comes to interest rates and combating inflation, it could mean good news for annuity sellers…or maybe bad.

According to Mike McCarthy, vice president, distribution strategy for Prudential, in an interview with Editor John Hilton of InsurancesNewsnet.com, he stated, “What I would say is rising interest rates are kind of a double-edged sword. Slow and steady is good. But fast and furious could be bad and potentially disastrous.”*

The Fed released a report comparing two different scenarios: slow sustained rates increasing over time, and a short-term significant rise in rates.

The former scenario is considered good for insurance companies and their earnings. It also dissuades them from looking at investing in potentially illiquid highly interest-rate sensitive investments.

But the rapid rate increases brings the “potential of having large amounts of life insurance policies surrender, annuity contracts surrender, because investors are out there have an opportunity to drive higher yields elsewhere,” McCarthy added. “So, what I would say there is make sure you know who you’re doing business with.”

Earlier this summer, the Fed raised benchmark borrowing rates by half a percentage point, the second increase of 2022 as inflation runs around a 40-year high. In an interview with The Wall Street Journal, Fed Chair Jerome Powell vowed to hike rates again and again if needed to bring inflation down to its 2% target. That approach being applied again this September. “We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down,” Powell said.

McCarthy cited two other reports that paint a troubling picture for insurers if rates rise too quickly:

• An April Moody’s report studied the impact of a 3% rise in long-term interest rates. The report pointed out that the leverage ratio — the ratio of assets to equity — is currently at a 20-year high among life insurers.  That ratio stands at 12-to-1, compared that to the P&C channels, where it’s 3-to-1.

• In October, the International Monetary Fund released “the most ominous” report.  It concluded that a rapid rise in interest rates would cause “massive disintermediation” and could lead to U.S. policy surrenders totaling $550 billion.

Opportunity For Indexed Annuities

The panel agreed that rising rates could open the door for annuities sold with risk-controlled indexes. These types of products will utilize, for example, a heavy bond component in order to remove the risk elements.  Unlike other fixed-money financial instruments, such as CDs and treasury bills, FIAs offer the opportunity to participate in the stock market. But FIAs have a 0% floor, so owners can never lose money. Fixed products are traditionally more popular in economic downturns.

Fixed annuity sales overall took off in March, coinciding with the first Fed rate increase. Fixed indexed annuity sales were $16.3 billion, 21% higher than prior year, the Secure Retirement Institute reported. Fixed-rate deferred annuity sales increased 10% in the first quarter, year-over-year to $16 billion.

FIA indices normally have a 10- to 20-year “lookback” period to determine performance. In the present environment, that lookback period will make FIA products look more attractive. These products are due to change, however.

At ProducersXL, we offer a wide range of Fixed Indexed annuities (FIA’s) from A-rated carriers with terms between 3-12 years.  There are different options for allocations to show returns from many different places. There are allocations in the S&P 500 but also in CitiBank, Goldman Sachs, JP Morgan, Nasdaq-100, Fidelity Multifactor, Morgan Stanley Dynamic Global Index.

We have products for Accumulation and Legacy. And if you are looking for an income you can never out live, call Scott Sandquist for details on the line of products that offer that.

*InsuranceNewsNet Senior Editor John Hilton

For more Industry News and Tips and Resources regarding Retirement Planning,

Reach out to Scott Sandquist.